Penalty/Liquidated Damages Clauses

The Supreme Court has recently re-written the rules on penalty/liquidated damages clauses.

Gone is the old test of whether a clause reflects a genuine pre-estimate inthe event of breach (which was enforceable) rather than intending todeter a breach (which was not).

The new test is whether a clause gives rise to a consequence out of all proportion to the harmed party's legitimate interest (even if also potentially being penal). If not it will stand. If so it will be unenforceable. What constitutes a legitimate interest will be determined on a case by case basis.

So we move away from looking at whether a clause is aimed at deterring breach to looking at whether it seeks to providecompensation in the event of breach out of all proportion to the innocent party's legitimate interest. It is worth noting that the fact that a clause is not a genuine pre-estimate of loss will not simply mean that it is penal.

Each case requires consideration of the circumstances in which a contract was made and the nature of the parties respective positions when considering the nature of a clause. In a negotiated contract between advised parties of comparable bargaining power the initial presumption will be that the parties were the best judges of what could be legitimate in the event of breach. Where the parties are not “equal” in bargaining position or a clause is not negotiated but imposed there is more scope for argument.

Please note that these notes should not be relied upon as legal advice or an interpretation and application of the law to particular circumstances or matters.

The material in these notes has been designed solely for the purpose of giving general guidance. The material does not stand on its own and is not intended to be relied upon for giving specific advice.

To the fullest extent permitted by law, Gisby Harrison will not be liable by reason of any breach of contract, negligence or otherwise for loss or damage (whether direct or indirect) occasioned to any person acting or omitting to act or refraining from acting on these notes or any error or omission in the notes.

Loss and damage as referred to above shall include, but is not limited to any loss of profits or anticipated profits, damage to reputation or goodwill, loss of business or anticipated business, damages, costs, expenses incurred or payable to any 3rd party (in all cases whether direct or indirect) or any other direct or indirect loss or damage.

Disclaimer
The information on this page may have been provided by a contributor to ChinaGoAbroad, and ChinaGoAbroad makes no guarantees about the accuracy of any content. All content shall be used for informational purposes only. Contributors must obtain all necessary licenses and/or ownership rights from the relevant content owner(s) before submitting such content (including texts, pictures, photos and diagrams) to ChinaGoAbroad for publication. ChinaGoAbroad disclaims all liability arising from the publication of any content/information (such as texts, pictures, photos and diagrams that infringe on any copyright) received from contributors. Links may direct to third party sites out of the control of ChinaGoAbroad, and such links shall not be considered an endorsement by ChinaGoAbroad of any information contained on such third party sites. Please refer to our Disclaimer for more details.
Top